March 21, 2025 - 11:20am
If the Labour Party is making cuts to welfare and wider Government spending, you know the fiscal circumstances must be pretty tight. Let’s not pretend that any of the large new cohort of Labour MPs came into politics to mimic the David Cameron and George Osborne double act, only a decade later.
But this is precisely where they find themselves, with Work and Pensions Secretary Liz Kendall announcing the biggest cuts to the welfare budget since 2015, while Chancellor Rachel Reeves is set to announce a swathe of spending cuts in next Wednesday’s Spring Statement — the largest for five years.
Telegraphed as early as December last year, mere months after her Autumn Budget, Reeves’s spending review will be a direct response to even lower economic growth than the already meagre forecasts. That was before the economic instability wrought by Donald Trump’s presidency, let alone the defence spending implications of the new administration’s approach to Nato and Ukraine. The headwinds blow ever harder.
Labour’s large majority ought to have given the Government more breathing room. But the majority was sought on a “don’t frighten the horses” manifesto, with a specific promise not to raise “the big three” — income tax, National Insurance and VAT — and a commitment to somewhat inflexible fiscal rules.
These were signals intended to reassure voters and markets respectively, but today they serve as a pair of tight fiscal handcuffs, limiting Reeves’s room for manoeuvre and functionally mandating her to cut spending. Might the Labour Party have been better served by leaving the door open at the last election to tax rises, suffering a slightly smaller but still workable majority?
Reeves finds herself boxed in by Labour’s own risk aversion. The party lacked enough confidence to fight off the Conservatives on tax and fiscal policy — even as the Tories themselves were in disarray, and had broken a manifesto pledge on raising National Insurance (though it was later reversed).
In isolation, the welfare cuts are reflective of a wider journey that Labour has made with respect to disability benefits. Regardless of the cause of increases in the reported levels of mental ill health, the implications for the welfare bill of a large growth in claimants are profound. MPs on the Government benches may be uncomfortable, but they are recognising the need to get people back into work as a kindness, as much as it can represent a painful shove.
Labour’s leadership will need to tread carefully in the coming weeks. This comes down to more than just fractious relations with MPs who didn’t go into politics to vote for austerity and cutting welfare for the least well-off. It’s a fundamental strategic question: how does the UK break out of two decades of economic stagnation? When the Labour Party is making cuts to Government spending, it is out of necessity, not ideology.
Some of the ingredients are there, and a recognition that things cannot go on as they have is a start. There has also been a diagnosis of poor economic growth rooted in the regulatory state, as well as initial reforms to unnecessarily strict planning rules. Only growth can offer a stable footing to continue funding public services into the future. But Labour is still being called out for having an insufficiently defined and tangible “Theory of Growth”.
Growth may be the mission, but the roadmap remains unclear. Underlining the opacity, the Telegraph has reported that the Office for Budget Responsibility will downgrade the country’s expected economic growth in 2025 by half, from 2% to 1%. How can the Labour Party promise that, in four years, Britons won’t end up back in the same position as under the outgoing Tory government, with more debt and less fiscal leeway? And without sunlit uplands to march towards, what is the point of being a loyal MP?
A theory of growth will help this government tell its story, deliver the improvement in living standards and public services that matter to voters, and give MPs a flag to rally around. Illustrating the challenge, only this week planning permission for homes in England fell to a fresh record low. For all that growth is the Government’s stated priority, it doesn’t yet feel like it. The Chancellor had better get cracking.
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SubscribeIt would be nice if political commentators would learn some economics rather than listen to think tanks and inhabitants of the South-East bubble. Building more houses is, in general, a good thing but it is *not* a source of economic growth. There are not small, let alone vast, amounts of under-utilised labour and other resources in the UK. Building houses isn’t going to increase the labour force or do anything much apart from divert resources from genuinely productive investments.
If anyone wants economic growth, then two things are necessary. First, reduce consumption (including housing) to divert resources to investment in producing goods and services that the world (including us) is willing to pay for. Second, ensure that the investment that does occur goes to improve the productivity with which our resources are used in producing goods and services – not just labour productivity but the productivity of capital, land or natural resources, and knowledge – what economists call total factor productivity.
Almost everything about the current government’s policies (and the previous one’s too) is directly or indirectly designed to sabotage the requirements of economic growth. Take one example: closing the Grangemouth refinery and petrochemical plant, followed by investing in capacity to produce biofuels from timber (as proposed) is as close to committing to cutting off one’s nose to spite one’s face as one can imagine.
The reality is that the UK’s governing class only pretends to want to promote national economic growth. What they actually want is to divert resources to sustain or improve their personal consumption – whether in the form of housing or indulgence of luxury beliefs. We are back to a variant of Correlli Barnett’s upper classes of the early 20th century who were incapable of doing anything other than driving a dying economic system over a cliff.
“The reality is that the UK’s governing class only pretends to want to promote national economic growth. What they actually want is to divert resources to sustain or improve their personal consumption ”
Well said.
I’ll add that it’s not mere growth (GDP) we should be chasing, or even GDP per capita (which can be skewed by the very rich), but widespread prosperity (measure it, if you must, by the purchasing power of the median income).
I’ll believe that the ruling class are serious about widespread prosperity when they drop all the Net Zero nonsense, cut government bureaucracy and stop importing desperate workers whose living is subsidised by taxpayers.
Cracking down on scroungers has its place too; or if you prefer, encouraging work among all those who are able.
But this government (like all those I’ve known in my lifetime) is content to redistribute wealth to its favoured groups, foreign and domestic.
“producing goods and services that the world (including us) is willing to pay for.”
Hard to think of a better example of something people are willing to pay for than housing. The issue as always is our legal system that seems to have been designed to make it as hard as possible for an honest person to get what they want, while making it as easy as possible for the dishonest to take as they please. In the case of housing – planning regulations are an example of the former, and squatting rights an example of the latter.
I’m not an economist, yet what you have written is patently the case. I think one of the great problems we have is that most politicians simply cannot see beyond the election cycle, and the few who can rarely make it to the top because long-term thinking is not instantly popular. We have, in effect, a system that massively encourages populism (in its true sense, not the pejorative it has become). If we truly want to raise everyone’s standard of living it’s no good carrying on with the current Ponzi-scheme economics.
Basing economic growth on consumer spending is very shortsighted but politicians everywhere have got themselves into a “no-cuts” corner. It’s not hard to see why. Britain needs a PM like Churchill (but with a better grasp of economics), someone who will offer nothing but blood, sweat, toil and tears for ten years while Britain switches from consumption to investment. As for under utilised labour, Britain has a much higher economic inactivity rate than most countries. That figure needs to be drastically reduced.
“Planning permission for homes in England fell to a fresh record low” is actually a double whammy as, going on current trends, they will all go to recent arrivals and those indigenous claimants on the list for years will never get to the top.
We need to recognise that:
a) GDP growth of any consequence is unlikely over the next decade, and:
b) we cannot possibly sustain our current levels of public spending and borrowing.
These facts are simply economic reality and trying to change or ignore them is as futile as trying to change the weather.
The sooner politicians and journalists confront this reality and start speaking honestly, the sooner we can start having a sensible discussion and try to find a way forward.
Or: “current levels of public spending and borrowing” mean “GDP growth of any consequence is unlikely over the next decade”.
The irony is that economically we are on the cusp of an AI revolution which will massively increase productivity over the next two to three decades (with associated economic shocks to established businesses). Instead, we have a set of administrative and energy bottlenecks that make it impossible to see anything like a UK Google or Meta, or Uber or even Tesla starting in the UK.
The public sector have made economic growth a huge obstacle course full of assessments, audits, box ticking (see Online Safety Act) and non-core issues like sustainability and DEI policies. And they add to that by spending even more money on workshops, consultations and research to try to understand why growth isn’t happening.
The answer should be to take a chainsaw to the regulations, and from that the administrators and consultants suckling at the regulation taps. This would both reduce public and private sector costs, and free up individuals to work in genuinely productive work and innovation. Take off the safety belts and support those with the courage to take risks.
I don’t believe that cutting regulation and public spending would lead to higher growth although I think it would be a good thing. The reasons growth is a unrealistic objective are rooted in the wider global economy. The ‘Singapore-on-Thames’ idea is attractive but really just a fantasy.
AI won’t increase productivity: it will reduce costs, which isn’t the same thing and which won’t lead to growth.
“Illustrating the challenge, only this week planning permission for homes in England fell to a fresh record low.”
The number of planning permissions is really not relevant as it doesn’t always correlate with the number of houses that been given permission to be built. In 2024 that record low comprised 241,000 dwellings. That figure is higher than the number of dwellings approved in all the years from 2008 – 2014.
https://www.gov.uk/government/statistics/planning-applications-in-england-october-to-december-2024/planning-applications-in-england-october-to-december-2024-statistical-release#:~:text=The%20latest%20provisional%20figures%20show,the%20year%20to%20December%202023.
A Theory of Growth is not the answer but a Theory of Honesty. Britain has been living on the never never for decades – selling off state assets, taking in dodgy money from Russians (temporarily on hold), maxing out the national credit credit and allowing a welfare culture to drive the economic inactivity rate far too high leading to a level of immigration that is adding to housing and other pressures, increasing welfare costs and creating social and community tensions.
Growth? Yeah, how does that work? Shut down all fossil fuelled power stations, spend billions £ with foreign wind solar power plant manufacturers and increase the price of electricity 4 fold? Just one example of moronic govt incompetence…….plenty more where that came from….
At this risk of sounding like a broken record, there is an obvious way to growth – ditch net-zero, and “drill baby drill”.
The price of energy is an input to any and all human endeavours, and we have the some of the most expensive energy in the world.
It stands to reason then, that there must be many potential growth opportunities that aren’t currently being exploited because they are uneconomical at today’s energy prices.
It is also obvious, that at some point, we are all going to have to get real, and understand that net-zero by 2050 just isn’t possible without economic ruin.
The question is whether we will have to wait for Labour to replaced by a party that will drop it.
Provided it’s a theory that matches reality, that is.
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